Two firms, Gene's Gloves and Wally's Wallets, have factories near a lake. Both firms use a chemical for tanning leather. Some of this chemical runs into the lake. Each year Gene's Gloves dumps 15,000 gallons of the chemical and Wally's Wallets dumps 25,000 gallons of the chemical into the lake. A new study has found that fish and other wildlife are negatively impacted by this chemical. The government has decided to cap the total combined amount of the chemical that the factories can dump into the river at 10,000 gallons/year. For an addition $1/gallon, Wally's Wallets is able to substitute each gallon of harmful chemical for one gallon of a harmless alternative. Gene's Gloves needs to use the harmful but more effective chemical to produce gloves. It costs $3/gallon to safely dispose of the harmful chemical. Assume that Gene's Gloves and Wally's Wallets maintain the same level of production under the new environmental restrictions. Suppose the government gives each firm the right to dump 5,000 gallon/year.If the firms can buy or sell these rights, what is the total cost to both firms for complying with the regulation?

Gene's Gloves was given the right to dump 5,000 gallons of harmful chemicals. It will need to spend $10,000 ($1 per gallon x 10,000 gallons) to substitute harmful chemicals for harmless chemicals in order to keep working.

Wally's Wallet was also given the right to dump 5,000 gallons of harmful chemicals. It will need $60,000 ($3 per gallon x 20,000 gallons) to treat those chemicals and turn them harmless in order to keep working.

If Gene can sell its right to dump 5,000 gallons to Wally, for a price higher than $5,000 but lower than $15,000, both companies would win:

Gene would spend $15,000 in harmless chemicals but it would have between $5,001 and $14,999 in revenue from the selling of "pollution rights".

Wally will spend $45,000 in treating harmful chemicals but it will have to pay Gene between $5,001 and $14,999 for buying their "pollution rights".

chilljain33 chilljain33 · Answer 2 · 2022-02-16T14:47:31+01:00

Costs of dumping are such costs which are borne by a company to dump the wastes of production into the water bodies. Gene's Gloves will spend $15000 and Wally's Wallets will spend $45000 for dumping chemicals into the lake.

What are the costs of dumping?

Applying the values given in the information, we can calculate the cost of dumping chemicals for both the firms.

Cost of additional dumping over 5000 gallons for Gene's Gloves at a cost of $1 per each gallon. Additional 10000 gallons cost will be $10000.

Additional dumping for Wally's Wallets for, 20000 gallons at a rate of $3 will be $60,000.

It is to be noted that the government has given the option to sell the dumping rights and hence, if Gene's Gloves sells its rights of 5000 gallons to Wally's, the cost for dumping for Wally's Wallets will be lowered by $15000 totaling to $45000.

And, if the costs are sold to Wally's Wallets, then the cost of dumping for it will be increased by $15,000. However, it will still receive such amount from $15000, so it will be a win-win situation for it.

Hence, the costs that will be adjusted by selling the rights for dumping chemicals are as aforementioned.

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